Tax Transparency – the Common Reporting Standard: Implications for South Africa

Globally, taxpayers are becoming more interdependent, and engage in cross-border financial activities with more regularity. With this, comes the need for enhanced co-operation and understanding across countries on issues such as tax administration and transparency, to curb tax evasion and ensure a fair allocation of taxes to tax jurisdictions.

"The Common Reporting Standard (CRS) developed by the The Organisation for Economic Co-operation and Development (OECD), is a global standard for the automatic exchange of information relevant to tax. Over 50 jurisdictions have agreed to comply with the CSR, including South Africa, committing to exchange data in September 2017, and other jurisdictions will begin participating from 2018" states Ferdie Schneider, National Head of Tax at BDO South Africa.

The CRS is a base standard of reporting aimed at incorporating as many jurisdictions as possible on a mutually beneficial basis of "I'll show you mine if you show me yours." This means that for South Africans residing in, for example, the UK, the UK must report all those financial accounts held in the UK by the South Africans.

This comes after a mandate from the G20 leaders was released to take action against tax avoidance and tax evasion, as well as to promote greater fairness and trust in the international tax system. South African tax residents who have relied on offshore bank-secrecy rules to keep their financial matters beyond SARS' reach are left with a small window of opportunity to regularise their tax position before SARS starts knocking on people's doors.

The implementation of the CRS will have major implications for South African tax residents:

SARS is likely to discover undeclared offshore funds, which could result in criminal prosecution and understatement penalties. Application to SARS under the Voluntary Disclosure Program (VDP), prior the undeclared funds being discovered, however, could grant relief from criminal prosecution, depending on the circumstances. Under domestic law, financial institutions, including insurance companies, banks and trusts, will need to provide their local tax authorities with financial data on relevant beneficial owners of bank accounts, and those with interest in trusts and other entities - who are residents in other participating countries. Using a standard reporting format, this information can easily be imported into the taxpayer database of each country, making it easy to identify those who may have evaded or avoided paying tax; as well as those who may have made an error when submitting their tax returns. Running in parallel with other rules and legislation, such as the US Foreign Account Tax Compliance Act (FATCA), and the EU Savings Tax Directive, this initiative aims to build and strengthen tax transparency and reporting globally. FACTA is aimed at forcing non-US financial institutions (including banks, investment managers and even trusts) to report on US citizen account holders.

"For a developing country like South Africa in particular, the common global reporting standard for the automatic exchange of information between countries and tax authorities may be counterproductive as more resources are required to set up the relevant structures. In South Africa, we may not have the capacity as yet to take on the extra reporting. Furthermore, the privacy of the collected and submitted information is not clearly stated," expresses Schneider.

Implementing the CSR will place significant responsibilities on financial institutions. For South Africans in particular, "clear communication with clients is paramount for effective management of these new responsibilities. All customers will have to be informed of the new reporting requirements regarding their documentation," informs Schneider.

According to Schneider, it is vital that clients and customers are warned of the potential tax consequences of not reporting under the CRS and that the penalties could be high.

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